Thread by @ValueEducator

Detailed Analysis of Astec Lifesciences- A generic CRAMS player entering into Fluorination

CMP - ₹1,498

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1. BUSINESS SEGMENTS OF ASTEC LIFESCIENCES

• The company has two main business divisions which are:
a)Enterprise Sales
b)CRAMS

• The company sells active ingredients/ technicals and bulk formulations in their Enterprise Sales business. As a part of their growth strategy, The company entered into the CRAMS business in FY13.

• The company has an expertise in the triazole fungicide chemistry and the majority of the company’s products are based on this chemistry. The company also gets the majority of its revenues from the products in this category.

The key products of the company are Hexaconazole, Tebuconazole, Metalaxyl and Propiconazole where except Metalaxyl, the other products are triazole fungicides.

2. ACQUISITION BY GODREJ AGROVET

• Godrej Agrovet acquired an initial 53.64% stake in the company for ₹21 crore. The acquisition was done to drive the growth of the company by leveraging the Godrej brand and to realize the synergies between both the entities.

• Since then, Godrej Agrovet has consistently increased its stake in the company and Ashok Hiremath who was the Director of the company gradually kept on decreasing his stake as seen in the chart.

• In one of the company’s concalls, Mr Hiremath has mentioned that he is selling his stake for personal reasons and that has nothing to do with the future prospects of the company.

3. CRAMS BUSINESS OF ASTEC LIFESCIENCES

• Astec LifeSciences decided to enter the CRAMS business somewhere in 2012 as a part of their long-term growth plan. The company got 2 contracts in 2014 for their CRAMS business.

• The first contract was with Nufarm which is an Australian MNC for 10 years and the second contract was with Sumitomo Chemicals which is a Japanese company. These contracts were ‘take or pay contracts’ with the company planning to get ₹110 crores by 2016 from these contracts

• The CRAMS business of the company is based on long term contracts and the pricing is based on a cost plus model. The prices are determined before the year begins and the volumes are forecasted say, for a 3 year period.

• The company can go to its customers every quarter for price revision if there is a significant change in the price than what was originally agreed upon.

• To get business from global MNCs, you need to have a low dependency on China for raw materials. On this side the company undertook the following steps:

a)The company invested ₹45 crore for a backward integration plant to produce the intermediate which they were earlier

importing from China. This plant came online in 2018.

b)The company commissioned another plant somewhere in 2019 which has helped them to avoid margin erosion for some of their products. The company was dependent on China for the raw materials of these products.

• The company got almost 90% of its revenues from products based on the triazole chemistry therefore, the company wanted to de-risk themselves and move into products. As a part of this plan, the company decided to invest in a herbicide plant which will produce both herbicides

and intermediates. The company commissioned their herbicide plant in August 2021.

• This herbicide plant would be used for the CRAMS business. The company was successful in commercializing an intermediate which would be used for the manufacturing of a patented herbicide.

This intermediate has the potential to be a high volume product.

• As a result, the company has been successful in increasing its revenues from the export market from ₹115 crore in 2015 to ₹391 crore in 2022.

The company subsequently increased its contribution from the exports market from 41% in 2015 to 58% in 2022.

4. CAPEX PLAN

• The company had planned a capex of ₹350 - 400 crore for FY23 and going forward, the details of which are as shown in the image:

a)The company invested ₹110 - 120 crore for their R&D facility which has recently come onstream. The new R&D center has come up at Rabale, Maharashtra. The R&D center is part of the plan of the company to grow their CRAMS business.

Post commissioning of this R&D facility, the R&D strength of the company has increased to 100 to 70.

b)The company commissioned its herbicide plant in August 2021 and is planning to do a further capacity expansion in this plant. This expansion will require an investment of

₹35 - 50 crore. The company attained ₹25 crores in revenues from the herbicide plant within 5 months of operations. The company expects to attain ₹230 - 270 crore from the herbicide plant when it attains full utilization in the next 2-3 years.

This may increase even more due to the capacity expansion which is being planned by the company.

c)The company has planned an investment of ₹150 crore for a Greenfield MPP. The company expects to commercialize this plant in the next 3-4 years.

The products under this MPP will be a mix of fungicides and intermediates.

d)The company has kept ₹70 - 80 crores for improvement & safety compliance activities at their Mahad facility. The company plans to digitize their facilities to match the innovator or global standards.

The company has started a safety initiative with DuPont sustainable solutions to become the best in class in terms of process safety.

• The company expects an asset turn of 1.5 to 1.7 for all investments they do. All their plants are multi purpose plants.

The key here is to get the right product portfolio in these plants, attain a particular capacity utilization level, systematically add some of the new products via debottlenecking and scale up the capacities to generate more revenues and profitability.

• The company has sufficient funding lines in place with appropriate arrangements hence they are not planning a rights issue to fund this capex.

5. FUTURE OUTLOOK

• The company plans to commercialize 2 molecules every year going forward on the CRAMS side. The company got 11% of their revenues from the CRAMS business as of H1FY23 and they plan to get 50% revenues from this business in the long term.

• The strategy of the company going forward will be to enter new chemistries, gain expertise in that chemistry, expand their product line in that chemistry and possibly do a backward integration till KSM which means they will have a control over entire life cycle of the product.

• The new products which the company will develop will mostly be sold to the existing customers of the company with whom the company has a well established relationship.

• The company is planning to look for new vendors in domestic and foreign geographies to reduce their raw material dependency on China.

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